Almost everyone, by choice or by circumstance, has left an employer during their working career, possibly several times. When you did so, did you leave something behind? No, I do not mean that half-eaten candy bar in your desk drawer. Did you leave a 401(k), or similar retirement plan, with your former employer? If you are anticipating a move from your current employer and participate in their retirement plan, what should you do with this account post-separation?
In short, you have 4 options:
- Do nothing.
- Roll the money in the account over to your new employer’s retirement plan.
- Roll the money into an IRA account.
- Take the money and run. Don’t do this.
Assuming the value of the account is over a minimal amount (as determined by your employer), you will likely have the option of keeping the account where it is. And this is not necessarily a bad option if you are happy with the investment choices at your former employer and the plan has low fees. If either is not true, then a switch should be made.
Moving the funds to your new employer’s plan can make a lot of sense for simplicity’s sake. Keeping all of your assets in one place will streamline your financial planning life now as you need only track the performance and growth of one account. Later, in retirement, having only one 401(k) plan greatly simplifies your accounting when you start making withdrawals, particularly when you reach 72 years old when you are required to make withdrawals from a traditional (non-Roth) retirement account.
However, just as you considered the investment options and management fees of your former employer’s plan, apply that same lens to your current employer’s plan. If you are not very happy with the new plan, rolling over the old 401(k) to an Individual Retirement Account (IRA) is likely in order.
Your first step in this process is to decide at which financial institution this IRA account should live. The choices are vast, but you can narrow the field by looking for financial institutions that offer a variety of low cost index fund options. Your next decision will be to select investment options that are appropriate for your risk tolerance and risk capacity. Many financial institutions simplify this process by suggesting investment options based on an assessment of your risk profile. If you were happy with the investment options at your previous employer, you can simply replicate this with your IRA (possibly using the exact same investment firm).
The mechanics of rolling over your 401(k), whether to an IRA or to your new employer, should be fairly straightforward; the “receiving” financial institution will gladly walk you through it and help you with the paperwork. The important point is that you want to make a direct rollover from your old 401(k) plan to its new home, without stopping first in your bank account. If funds are not re-deposited from an old retirement account to a new retirement account within 60 days, it is treated as a withdrawal and penalized accordingly.
Lastly, make sure that you are rolling over “like to like.” A traditional (pre-tax) 401(k) gets rolled over to a traditional IRA; a Roth 401(k) gets rolled over to a Roth IRA. (There can be a circumstance when you might prefer to move from a traditional 401(k) to a Roth IRA, however know that when you do so, you will be liable to pay income taxes with your next tax return on the funds that you roll over.)
Deciding what to do with old employer retirement accounts can feel complicated, but it does not need to be. So long as you keep your overarching retirement goals in mind, the task will follow quite easily.